United Gratiot Furniture Mart, Inc. v. Michigan Basic Property Ins. Ass'n

• Decision Date: 05 June 1987
• Docket Number: Docket No. 86023
• Parties: UNITED GRATIOT FURNITURE MART, INC., Plaintiff-Appellant, v. MICHIGAN BASIC PROPERTY INSURANCE ASSOCIATION, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 239

406 N.W.2d 239

159 Mich.App. 94

UNITED GRATIOT FURNITURE MART, INC., Plaintiff-Appellant, v. MICHIGAN BASIC PROPERTY INSURANCE ASSOCIATION, Defendant-Appellee.

Docket No. 86023.

Court of Appeals of Michigan.

Submitted Dec. 3, 1986.

Decided April 7, 1987.

Released for Publication June 5, 1987.

Alvin C. Sallen, Southfield, for plaintiff-appellant.

Denenberg, Tuffley, Bogan, Jamieson, Black, Hopkins & Ewald, P.C. by Charles R. Tuffley and Donna M. Skelcy, Southfield, for defendant-appellee.

Before DANHOF, C.J., and SHEPHERD and PORTER, ^* JJ.

DANHOF, Chief Judge.

On February 12, 1980, a fire destroyed the place of business of plaintiff, United Gratiot Furniture Mart, Inc. Defendant, Michigan Basic Property Insurance Association, insured plaintiff's inventory under a commercial fire policy but refused to pay plaintiff's claim of loss. Defendant contended that plaintiff's president and largest shareholder, Samuel Goldberg, either set or procured the setting of the fire. Plaintiff filed the instant action to collect the face amount of the inventory fire policy. The jury entered a verdict of no cause of action, finding that defendant had shown by a preponderance of the evidence that Goldberg was involved in starting the fire and that Goldberg's control in the corporation was so extensive that his actions should be imputed to the corporation and the corporation's claim of coverage should be denied.

Plaintiff first argues that defendant's defense was insufficient as a matter of law to permit defendant to deny coverage. This argument was raised in the context of a motion for directed verdict at the close of proofs. Plaintiff argues that the corporation was the insured, not Goldberg, and that denying coverage to the corporation unfairly penalizes the other shareholders, who owned fifty-six percent of the corporation's stock ¹ and who were not alleged to have participated in the setting of the fire.

As support for its position, plaintiff relies on Danish Inn, Inc. v. Drake Ins. Co. of New York, 126 Mich.App. 349, 337 N.W.2d 63 (1983). However, Danish Inn does not address the issue now before us. In Danish Inn, the trial court granted summary judgment in favor of the defendant insurer, finding that the sole fact that the plaintiff corporation's principal shareholder and president had pled guilty to an arson-related misdemeanor charge was insufficient to enable the insurer to deny payment to the corporation. The main issue in Danish Inn was whether evidence of the guilty plea was admissible. The Court found that it was not admissible and, in so doing, criticized the decision of another panel of this Court in Imperial Kosher Catering, Inc. v. Traveler's Indemnity Co., 73 Mich.App. 543, 252 N.W.2d 509 (1977), as not being "sound law." The Imperial Catering panel had concluded that evidence of the arson convictions of the officers and sole shareholders of a corporation was admissible and provided a sufficient basis upon which to grant accelerated judgment. In the instant case, there is no issue concerning the admissibility of a criminal conviction as substantive evidence in a civil case arising out of the same occurrence which produced the conviction. In the instant case, the fact that Samuel Goldberg participated in the arson was demonstrated by evidence introduced at trial. Danish Inn cannot be read as addressing any of the issues now being raised. Moreover, Danish Inn expressly recognized that the actions of a corporation's officer and principal shareholder could be imputed to the corporation in circumstances where there is a finding that the corporate entity should be disregarded. 126 Mich.App. 351, 337 N.W.2d 63. By its verdict, the jury made such a finding in the instant case.

The instant case presents an issue of first impression for the appellate courts of this state, i.e.: In what situations should an insurance company be allowed to deny payment to a corporation for a fire loss when evidence demonstrates that a shareholder wilfully set the fire?

Plaintiff argues that the corporate form should be disregarded only when the arsonist is the sole shareholder. In situations where the arsonist is not the sole shareholder, plaintiff argues that insurers should be required to pay the corporation's claim. An insurer may then, as a subrogee of the corporation, bring an action against the arsonist to recover the amount it had been required to pay to satisfy the corporation's claim. Plaintiff contends that such a procedure would provide insurers adequate protection without injuring innocent shareholders. ²

Defendant contends that insurers should be allowed to refuse payment in all situations in which the stockholder who commits the arson exercised "complete dominance and control" over the corporation--regardless of that stockholder's percentage share of ownership in the corporation. The trial court agreed with defendant and instructed the jury accordingly.

The general rule is set forth in 43 Am.Jur.2d, Insurance, § 494, p. 565:

"As a general rule, the wilful burning of property by a stockholder of a corporation is not a defense against the collection of insurance by the corporation; nor can a corporation be prevented from collecting the insurance because its agents wilfully set fire to the property without the participation or authority of the corporation or of all the stockholders of the corporation. On the other hand, if there is a conspiracy among the stockholders of a corporation to burn the property of the corporation, and the property is burned in pursuance of the conspiracy, such act is chargeable to the corporation and is a good defense to an action on a fire insurance policy. Likewise, under the principle of law that no one should be allowed to profit by his own wrong, an insured corporation will not be allowed a recovery on fire insurance policies where the incendiarist owns all or practically all of the stock in the insured corporation, or is in exclusive management of the corporate property." (Emphasis added.)

The subject has been extensively annotated. See Anno: Fire Insurance on Corporate Property as Affected by Intentional Destruction by a Corporate Officer, Employee, or Stockholder, 37 A.L.R.3d 1385.

In almost every case which has addressed the issue now before us, it appears that the point on which the decision turns is the degree of control which the incendiarist has exerted over the affairs of the corporation. If the individual who set or procured the setting of the fire dominates the corporation to such an extent that he has exclusive control over the corporation, the corporation is precluded from recovering benefits under its fire insurance policy. See, for example, D.I. Felsenthal Co. v. Northern Assurance Co. Ltd., 284 Ill. 343, 120 N.E. 268 (1918); Northern Assurance Co. v. Rachlin Clothes Shop, Inc., 32 Del. 406, 125 A. 184 (1924); Kimball Ice Co. v. Hartford Fire Ins. Co., 18 F.2d 563 (CA 4, 1927); Miller & Dobrin Furniture Co., Inc. v. Camden Fire Ins. Co., Ass'n, 55 N.J.Super 205, 150 A.2d 276 (1959); Vicksburg Furniture Mfg., Ltd. v. Aetna Casualty & Surety Co., 625 F.2d 1167 (CA5, 1980); Continental Ins. Co. v. Gustav's Stable Club, Inc., 211 Neb. 1, 317 N.W.2d 734 (1982).

This rule is applied even when the arsonist is not a majority stockholder. Kimball Ice, supra (the arsonist owned twenty-five percent of the corporation's stock); Northern Assurance Co., supra (the arsonist was not "the largest cash investor"), Continental Ins. Co., supra, (the arsonist owned fifty percent of the stock and his ex-wife owned the other fifty percent); Vicksburg Furniture, supra (the arsonist owned twenty-five percent).

However, in instances where it is not shown that the arsonists had exclusive control over the corporation, insurers are not permitted to deny coverage. See, e.g., Erlin-Lawler Enterprises, Inc. v. Fire Ins. Exchange, 267 Cal.App.2d 381, 73 Cal.Rptr. 182 (1968); Fidelity-Phenix Fire Ins. Co. of New York v. Queen City Bus & Transfer Co., 3 F.2d 784 (CA 4, 1925).

The cases have expressed various rationales for their holdings. In D.I. Felsenthal, supra, the Supreme Court of Illinois relied on "[e]very principle of insurance law and sound reasoning" to conclude that a corporation should not be allowed to recover on a policy for the destruction of corporate property when the fire was set by an individual who was the beneficial owner of "practically all of the stock in the corporation and who had absolute management and control of its affairs and its property." 284 Ill. 348-349, 120 N.E. 268. In Northern Assurance Co, the Supreme Court of Delaware found that the acts of a person with exclusive control which were done for the purpose of benefiting the corporation were to be regarded as acts of the corporation itself. 32 Del. 415-421, 125 A. 184. In Kimball Ice, supra, the court found insurance fraud would be encouraged if the corporation could simply turn control over to a single person, who could effect the wilful burning of the insured's premises, and then assert a claim of innocence on the part of the other shareholders. 18 F.2d 567. In Miller & Dobrin Furniture Co., the court based its decision on the equitable principles that the corporate form should not be used as a shield to perpetrate injustice and that no one should be allowed to benefit by his own wrongdoing. 55 N.J.Super. 218-219, 15 A.2d 276.

We find the above-cited authorities persuasive. We hold that an insurance carrier may assert arson as a defense against a corporation's claim of fire loss if it is factually demonstrated that the individual who set or procured the setting of the fire exercised complete dominance and control over the affairs of the corporation.

We reject plaintiff's contention that it would be more equitable to require defendant to pay the claim and then bring an action against Goldberg as plaintiff's subrogee. Our rejection is based on two grounds. First, there would be no guarantee...